Saturday, June 04, 2016

Do feathers fall as fast as iron balls?

Josh Hendrickson's Twitter account is @RebelEconProf, and his blog is The Everyday Economist. So if both these names are accurate, I can only assume that Josh adheres to Mao's theory of Perpetual Revolution!

That has nothing to do with this post, I just always wanted to say that.

What this post is really about is that Josh wrote a post about my Bloomberg post about Econ 101! So I decided to write a counter-rebuttal post. Hmm.

Noah Smith’s dislike of Econ 101 seems to come from the discussion of the minimum wage.

Not really, no. That's just one example. It's probably one of the more egregious examples when it comes to the quality of the public discussion, but in terms of 101 models not fitting the data, there are better examples. For example, immigration is a positive labor supply shock, and positive labor supply shocks push down wages, right? Well, no, not in reality. That debate is probably a lot more settled than the minimum wage debate.

Josh:

[Noah's] basic argument is that Econ 101 says that the minimum wage increases unemployment. However, he argues that:

That’s theory. Reality, it turns out, is very different. In the last two decades, empirical economists have looked at a large number of minimum wage hikes, and concluded that in most cases, the immediate effect on employment is very small.

This is a bizarre argument in a number of respects. First, Noah seems to move the goal posts. The theory is wrong because the magnitude of these effects are small? The prediction is about direction, not magnitude.

If a theory represents only one tiny piece of reality, should we teach that theory front-and-center, in intro classes, as the main lens through which we are to understand the world?

I say no.

Here's an analogy. Suppose I drop a feather and an iron ball off of the Leaning Tower of Pisa, at the same height. Which one hits the ground first? Correct answer: The iron ball. It's denser than the feather, so it is less slowed down by air resistance. In fact, it's not even close.

Now, Newton's laws (including the classical Law of Gravitation) are a lot more general than air resistance. You need to learn Newton's Laws, just like you need to learn supply-and-demand.

But if you teach Physics 101 kids that Newton's Laws imply that feathers and iron balls fall at the same rate here on Earth, you're going to be embarrassed when some smartypants kid points out that no, they don't actually. And then the kids are going to start thinking physics is quackery.

This is why Physics 101 teachers are careful to emphasize that Newton's Laws only describe motion well when you can neglect air resistance. And then they send the physics kids to a lab, where they can see how and when air resistance matters, by looking at the evidence.

Econ 101 teachers are not always so humble in their presentation of theories, nor do they always defer to the evidence as the ultimate arbiter. And because of this, Econ 101 students are going to grow up, and they're going to read a Nick Hanauer column saying econ is total bullshit, because we keep raising the minimum wage and it hasn't and they're going to think "Everything I learned in Econ 101 was wrong!" Then they're going to turn to alternate sources - ideological movements, wordy literary tomes, etc. - to help them understand the economy.

In fact, this has already happened to a substantial degree.

Anyway.

Josh:

Second, David Neumark and William Wascher’s survey of the literature suggests that there are indeed disemployment effects associated with the minimum wage and that these results are strongest when researchers have examined low-skilled workers.

OK, yeah, the debate surely isn't settled. Not as much as, say, the immigration debate. But meta-analyses show that the estimates of the studies with the largest sample sizes cluster at exactly zero effect. It seems to me that the people saying the short-term effect is quantitatively small haven't yet won, but they're winning.

Josh:

Forgetting the evidence, let’s suppose that Noah’s assertion that the discussion of the minimum wage in Econ 101 is empirically invalid is correct. Even in this case, the idea that Econ 101 is fundamentally flawed is without basis. When I teach students about price controls, I am careful to note the difference between positive and normative statements. For example, many students tend to see price controls as a “bad” thing. When I teach students about price controls, however, I am quick to point out that saying something is “bad” is a normative statement. In other words, “bad” implies that things should be different. What “should be” is normative. The only positive (“what is”) statement that we can make about price controls is that they reduce efficiency. Whether or not this is a good or a bad thing depends on factors that are beyond an Econ 101 course — and I provide some examples of these factors.

Josh seems a bit confused here about what I'm saying. I'm not arguing for the inclusion of normative economics in Econ 101. I'm saying that if you don't teach Econ 101 kids some evidence, you're getting the positive economics wrong.

Josh:

The value of Econ 101 is the very process of thinking through [the] possible effects [of a policy change like the minimum wage]. What effect we actually observe is an empirical question, but it is of secondary importance to teaching students how to logically think through these sorts of examples.

Here's a real difference in philosophy between me and Josh. Josh thinks that teaching kids how to think deeply about the implications of models is Job #1, and everything else is of secondary importance. I think that if people use the wrong model to think about real-life situations, then this kind of deep logical thinking becomes worse than useless. Thinking deeply about bad models just leads to yet more mistaken conclusions about reality. I think Job #1 is to figure out how to use evidence to tell good models from bad.

You can learn how to think deeply through model implications in your second-year classes, after you have a realistic understanding of how to know whether you should do so in real life. Theories are powerful tools, and I think the first lesson for any powerful tool should be how to use it responsibly.

Josh:

If you are a student who only learned the perfectly competitive model in Econ 101, then you should politely ask for a refund. Econ 101 routinely includes the discussion of externalities, public goods, monopoly, oligopoly, etc. All of these topics address issues that the competitive market model is ill-equipped to explain.

On this point, Josh and I are in total and complete agreement. This is what I mean when I bash "101ism".

Anyway, thanks to Josh for responding, and I look forward to purging him and the other capitalist roaders from our glorious Cultural Revolution talking about this further!

Presumably he's talking about the Trock genre, or Time Lord Rock, which is a form of filk music dedicated to the Dr. Who fandom.

https://en.wikipedia.org/wiki/Time_Lord_rock

From a standpoint of writing objective history, I suppose a side effect of having a dapper British Gent with a phone booth and a photogenic young British girl rampaging around the timeline would be a state of Permanent Kuhnian Revolution among historians, as it would be equally accurate/inaccurate to describe the causes of any historical development before and after the side effects of the latest temporal paradox.

Google is freely available and works for everyone, Noah, there's no excuse for this sort of lack of journalistic due diligence. :p

(Alternately, Anonymous may be Gene Ray of TimeCube.com, come to warn of the importance of maintaining a stable planetary orbit in the face of constant Time Lord interference.)

But is Econ 101 really worth defending? We know it's next to useless to explain how prices are set (read: Alan Blinder's work for that). Rent controls = bad (or inefficient) are something that is almost unanimous among economists, but are they correct on this, and why is the evidence nearly non-existent on this, and when it's there, often shows the reverse (and why are Urban policy people so adamant on it)?https://psmag.com/in-defense-of-rent-control-3cb453119116#.q1ubc6no7

I mean no doubt econ 101 is a particular way of looking at the economy - but is it the correct way of looking at the economy, or is it just an ideological lens with which to look at the economy? As you said, the labor market rarely works the way 101ers would suggest, particularly with immigration.

The better question is: when is 101 a good explanation of what happens in the economy with a solidly empirical backing?

I think your feather and iron ball example is excellent. Even when there are very simple physical laws involved, it isn't always easy to predict the results. Some years back a friend of mine worked on a training system for the Navy. The idea was to embed the knowledge necessary to teach someone how to start the engines on a capital ship. The simulation started with what they called "cold iron" and the goal was to get the engine idling. It sounded really simple. All you had to do was start the car so to speak, but the actual scenarios that emerged had increasing the boiler heat leading to a cold engine and circulating cold ocean water leading to overheating. As a training system, it had to deal with all these weird cases and help the student figure out what was going wrong and how to get it right.

Econ 101 has a bunch of simple forces involved, but real economic systems are much more complicated. There are almost always some weird dependencies that lead to the unexpected. If you want to look at the effect of something as simple as raising the minimum wage or setting a price ceiling, you have to look at a complete economic system. I'm not even sure that the traditional Econ 101 supply-demand curves are useful for doing this. It might be more useful to teach some very basic accounting and doing simple simulations, the kind that can be done in a spreadsheet. If nothing else, students could see how economic forces lead to economic decisions that in turn produce economic forces.

In a way, simple supply-demand curve thinking is pernicious. Those curves are not basic. They are emergent, and they don't emerge from a vacuum. It would make much more sense to think in terms of economic entities and the fact that there is no such thing as an economy of one.

Economists use "normative" to mean "prescriptive". Telling people what will maximize efficiency doesn't tell them that they ought to maximize efficiency, because there are often other competing concerns, like welfare (or virtue, justice, or cute videos of cats licking rabbits, etc.).

showing that there are competing concerns with other normative standards doesn't quite show the concept of efficiency to be non-normative. In fact, one could argue that only normative concepts could actually compete with each other. And those other concerns you name, Noah, could be shown to be non-normative as well: showing what justice is doesn't tell someone to be just and showing to someone what virtuousness is doesn't tell them that they ought to be virtuous. (Although I know that there are philosophers who would disagree with that). Then we have come full circle, because now we could say that none of the concepts we use in our evaluative talk have any normative meaning.

On the other hand, efficiency is the usual basis for most of the prescriptive judgements economists make. We evaluate policy alternatives on the basis of it. There are other standards that can be brought in, but as I pointed out, they are normative, too. And im not sure Josh would actually claim that in his policy prescriptions efficiency shouldn't matter, because it's a positive concept. That would disqualify everything economists would have to say as they are saying it.And I would like to see an economist, who - without any problem - can say the following sentence:The only good thing that we can say about price controls is that they reduce efficiency. Because efficiency is a bad thing.

I come down much more on Noah's side of this debate. The costs of having a lot of econ 101 educated people (who never went further) maintaining these models in their heads, under the assumption they are true, are high. It has a real impact on how people see the world and the decisions they make. The best presentation of these models to me would be one of: 1) here's the theory and implications 2) here's what the research says 3) they are very different--keep doing econ and you'll (maybe) learn why.

If the min wage hike is priced right it could bring in more overall income to min workers for fewer hours of work -- the first week. Those extra dollars _would have been spent_ proportionately more at firms employing higher wage workers -- by definition -- possibly causing job losses there.

Come first pay day for newly flush min wage workers those dollars will be spent where they wish -- instead. Since folks tend to spend proportionately more at firms employing similar wage level workers, min wage employment could plausibly increase.

Which is exactly what Card and Krueger found in their seminal study. The hike may have caused unemployment but everybody's looking in the wrong place for it. :-O*******************PS. According to John Archibald Wheelers' Sci Am book, A Journey into Gravity and Spacetime, the earth is pulling on space and space is pulling on the object -- why anything falls the same speed as anything else.********************May as well throw in another interesting labor market missing dimension:

In a labor market that contains (for the sake of argument 50% rich country workers (e.g., American born) and 50% poor country workers (must be something like Chicago which is 40% white, 40% black, 20% Hispanic) ...... where pay is set by what I call "subsistence-plus"; meaning set STARTING at the absolute minimum pay workers will tolerate (e.g., $800/wk for American born taxi drivers [me]; $400 for foreign born) and then PLUS some more for each additional level of skill (bottom for McDonald's, more for better English in Starbucks, more for college English and more competent organizing in Whole foods?) ...instead of pay set by the highest price the consumer is willing to pay -- by collective bargaining or a minimum wage ...... a huge dropout of low skilled, rich country workers will occur (the labor market will not clear). E.G., American born taxi drivers (me again) and the Crips and the Bloods. How else explain that 100,000 out of my guesstimate 200,000 Chicago, gang-age males are in street gangs?

Now here's the wind-up -- that should implant permanently the unquestionable need for collective bargaining in all labor transactions:A what I call subsistence-plus labor market with 100% rich country workers will have lower pay levels than a collective bargaining labor market with 50% rich/50% poor country workers.

That's the whole law and the profits about the need to make union busting a felony (starting in progressive states) as far as I'm concerned.

Newton thought that energy increased linearly with the speed. Energy increases with the square of the speed. A couple of hundred years ago physicists conducted experiments to see who was right. You go twice as far when you go twice as fast. :-)

When you see a new set of data, you apply the simplest and most parsimonious thing you have. If you want to overturn those laws by invoking special mechanisms, you better have strong evidence for them.

In case you don't see it, let me say this: weak response to weak treatments is not evidence for basic laws not working, especially for large treatments.

I recommend Rick Stryker's first two comments in the econbrowser post you mention, right at the top. Then read their continued debate in the following: http://econbrowser.com/archives/2014/03/faith-and-econometrics-minimum-wage-edition

Noah definitely comes out best in this debate. I went the whole hog and got my BA in econ, and so now in work when I have to evaluate a policy the first step is to consult the theory (externalities from an activity? perhaps there are policy implications!). Next up is a look at the literature and eventually obtaining data and doing the ground work to see how the empirics actually match up.

Given that many students never go beyond Econ101, it seems bizarre that the attitude to teaching this class comes down to "Hey, it's good for getting the students thinking about things in the right way". Particularly as students don't seem to start thinking "the right way", but instead internalise the information they get about the minimum wage, externalities etc.

Personally Econ101 wasn't exactly mentally taxing or time consuming, surely highly academics could strive for teaching a little more than what can be learned from a set of Youtube videos from bloody LibertyPen?

Josh: "The only positive (“what is”) statement that we can make about price controls is that they reduce efficiency."

I think there are two positive statements about price controls: (1) If effective, they reduce economic efficiency; (2) If they're NOT effective (i.e., a minimum wage of $9/hour when the equilibrium wage is $11.50/hour), they have no effect on efficiency (assuming the other assumptions of competitive markets hold - and, as Shakespeare noted, "Aye, there's the rub.")